The near-universal investor enthusiasm for commodities in calendar 2022 has tapered off in 2023 so far and for a couple of reasons, investment insiders Todd Warren and Andrew Hines told James Gerrish in a Market Matters webinar on Thursday.
Hines, head of research at Shaw and Partners, emphasised China’s lower-than-expected economic growth in the first half of this year as a key reason. And in a broader sense, commodity prices also pulled back on the realisation that the “inflation dragon was far from tamed,” he said.
“You need to separate the big picture, long-term thematics of decarbonisation and electrification, while also remembering that commodities are cyclical and driven by short-term growth,” said Hines.
He referred to the “Dr Copper” moniker that captures the metal’s role as something of a barometer of broader economic health in that it generally performs well in strong periods and poorly during economic weakness.
“At the moment we are concerned about the global growth environment and recessionary fears and that’s a negative, in the short term, for commodities like copper,” Hines said.
“But that’s a small intra-cycle within a bigger picture and it’s the reason why I say now is the time to get yourself set for those bigger picture thematics.”
Tribeca Investment Partners portfolio manager Todd Warren struck a similar tone, emphasising the favourable supply dynamics for copper. He points out that global copper demand is tipped to top 30 million tonnes per annum by 2030, from around 22 million tonnes per annum currently.
Putting that in perspective, BHP’s Escondida copper mine in Chile – the world’s largest – produces around 1 million tpa of copper.
“We need a new Escondida every year between now and 2030. We haven’t seen enough on-the-ground investment, we haven’t got enough to meet that demand,” Warren said.
Hines noted the difficulty of finding quality, listed, pure-play copper producers but points to BHP Group (ASX: BHP) as a good proxy for the broader sector.
He also referred to the Gold producers as a source of copper exposure, given the two metals are often produced together. One of the companies Hines likes in this regard is Evolution Mining (ASX: EVN).
“Analysts tend to talk about it as a gold producer with copper as a by-product but if you reverse that and think about it as a copper producer with gold mining credits, then it’s a very cheap copper producer,” Hines said.
Sandfire Resources (ASX: SFR) is another miner he discussed, though acknowledged it is quite expensive.
And among some of the sector's small caps, he named AIC Mines (ASX: A1M) as a stock on his radar.
“Run by Aaron Colleran, ex-Evolution, effectively they’re trying to replicate the success of Evolution over the last decade in growing a copper-gold business,” said Hines.
This company also ranks among the preferred Australian exposures for the Global Natural Resources team at Tribeca Investment Partners.
From a global perspective, Todd Warren named the Western world’s largest copper producer Freeport McMoRan as his preferred play.
“It’s the only copper producer that’s a member of the S&P, one of only two mining stocks in there, and these guys have some of the best copper assets on the face of the planet,” he said.
“They’ve done a wonderful job of harvesting their cashflows, they’ve paid down debt…now they’re near net cash with a portfolio of prospects it can deliver. It’s big, it’s liquid due to significant exposure to copper and gold.”
The webinar participants acknowledged the environmental difficulties surrounding the nuclear fuel source, particularly in Australia. But Hines emphasised his view that nuclear power is the only near zero-carbon solution that can provide baseload support for the intermittency of renewables.
“Around the world, you’ve got a situation where we’ve got more nuclear facilities under construction than we’ve had since the 1970s,” he said.
And there is currently a uranium supply deficit of around 50 million pounds a year. One of the key reasons for this is the most recent nuclear disaster in Fukushima, Japan.
“I think you’d be hard-pressed to find a bigger, deeper downturn in the history of the world than what we’ve seen in the last 13 years,” Hines said.
Similar to copper, the main story is the supply shortfall because there was no investment in the industry during this time.
“But it became pretty obvious in late 2018 into 2019 that decarbonisation was just a pipedream without nuclear being a big part of the solution. That’s the big sea change we’ve seen in the last three or four years,” Hines said.
Hines referred to Boss Energy (ASX: BOE), whose flagship Honeymoon Uranium Project in South Australia is expected to be producing again later in 2023.
He also discussed Peninsula Energy (ASX: PEN) as the next uranium producer, which is due to start producing from its Lance Projects in the US within the next couple of months.
Both Hines and Warren alluded to more significant uncertainty within the more saturated lithium market versus the copper and uranium sub-sectors.
“The number of re-cuts and resets of demand models was an everyday process,” said Warren.
“The challenge the market has been dealing with is the inability to know what price is being received. You were getting old, delayed data and a lack of visibility coming out of China.”
Both Hines and Warren noted that there is little shortage of lithium in the ground globally – though we might be short of economic lithium. The big unknown is – but we don’t know what the marginal cost is going to be of some of the more fringe tonnes.”
“And China is still such a dominating player in terms of the downstream procession of battery-grade lithium. They only need to stand back from the table for a day and a half and suddenly, there’s no buyer.”
“Longer-term we’re still bullish, but there are still some question marks,” said Warren.
Some other uncertainties are alluded to by Shaw and Partners’ Hines, who emphasised the complexity of the lithium and battery metals space as a story of both mining and chemicals.
“Much of the value will be captured by the battery manufacturers and the EV makers,” he said.
“Investors need to think very carefully about where in the value chain the value is going to be captured. It might, or might not be, the lithium spodumene producers – you need to think about the downstream as well.”
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